Vaccine approved in UK, iron ore price surging: shares to watch
What a start to December. Australia's economy officially snapped out of its first recession in 29 years, the UK became the first country to approve and roll out the Pfizer/BioNTech COVID-19 vaccine, and the iron ore price reached a seven-year high.
With these new developments in mind, here are some insights to help you identify opportunities in the market before we wrap up 2020.
Iron ore price surge
The iron ore price has climbed to a seven-year high, having risen 60% this year alone, with no signs of slowing down.
Demand is likely to grow as China aspires to double the size of its economy over the next 15 years and continues to produce 90 million tonnes of steel a month, with iron ore the main component. Around half of China's iron ore needs are met by Australia, so earnings for the iron ore majors are likely to continue to grow, in particular for Fortescue Metals Group (ASX: FMG).
Another reason for the iron ore price boost is Australia's biggest mining rival, Brazilian miner Vale, has lowered its annual production guidance of iron ore for a third time this year and set a smaller-than-anticipated production estimate for 2021. This sparked supply fears, driving the latest price jolt.
Aside from Fortescue (ASX: FMG), other miners set to continue to benefit from supply/demand constraints include Rio Tinto (ASX: RIO), BHP (ASX: BHP) and Mineral Resources (ASX: MIN).
Cyclicals, cyclicals, cyclicals
Last week, the latest data from the ABS showed Australia's economy technically grew out of recession, growing 3.3% from July to September - stronger than the 2.6% forecast. Clearly, the support mechanisms put in place by the Government are working.
Household spending rose 8% and is expected to remain elevated in the lead up to Christmas. The biggest kick was a 10% lift in spending at hotels, cafes and restaurants, health and recreation centres. Wages paid also rose 2.3% with part-time employment up the most.
The RBA forecasts Australia to have fully recovered from the economic downturn by the end of next year, with growth of 5% expected in 2021, and 4% the year after. Citi expects Australia will be back at pre-pandemic levels by Q1 next year, which is well ahead of other nations recovery.
Of course, we aren't completely out of the woods. The full aftermath and lasting impact of the COVID-19 pandemic remains to be seen.
In positioning your portfolio for 2021, consider companies likely to benefit from increased consumer spending, given restrictions have eased and household saving rates are at an all-time high. As we hear time and time again, it will be a domestic-led economic recovery, so consider companies who generate the bulk of their revenues from Australia/ New Zealand, such as Insurance Australia Group (ASX: IAG), Monadelphous (ASX: MND), and Mirvac (ASX; MGR).
Also consider companies set to benefit from the boost in Christmas retail expenditure, including City Chic (ASX: CCX), Premier Investments (ASX: PMV), Domino's Pizza (ASX: DMP) and Accent (ASX: AX1).
Over the next 12 months, the market is expected to rally, as the economic recovery happens faster than expected. While some fund managers and economists are expecting a market correction, many are predicting the ASX200 to rally 8-10% in 2021 (to 7300 points).
As we look to 2021, Australian domestic cyclicals are expected to continue to outperform (as outlined above). Beyond this, be on the lookout for increased merger and acquisition (M&A) activity in 2021. Activity is low compared to historical averages, so look at underappreciated stocks that are trading at a discount, have heavily spent on capital, and have a less restrictive share registries. Some examples of companies which fit the bill are Nufarm (ASX: NUF), Southern Cross Media (ASX: SXL), Computershare (ASX: CPU), Bravura (ASX: BVS), Infomedia (ASX: IFM) and Monash IVF (ASX: MVF).
Finally, Bell Potter has just released their list of must-have champion stocks which have strong, long term thematics heading into 2021. If the economy and company management remain stable, these stocks should see superior earnings and share price growth over the coming years. Some on the list include Amcor (ASX: AMC), Brambles (ASX: BXB), Challenger Group (ASX: CGF), Goodman Group (ASX: GMG) and Transurban Group (AX: TCL).
Have a safe and enjoyable festive season. Happy trading and see you in 2021!
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